(Article from Registered Funds Regulatory Update, July 2023
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On March 16, 2023, the United States Court of Appeals for the Second Circuit requested that the SEC file an amicus brief presenting its views on whether broadly syndicated term loans should be considered securities for purposes of the federal securities laws. The amicus brief will be submitted in the Kirschner v. JPMorgan Chase Bank litigation, which resulted from a 2014-syndicated loan transaction involving institutional investors purchasing $1.775 billion of Millennium Health LLC’s debt obligations from a syndicate of banks, including JPMorgan Chase Bank. Between 2014 and 2015, Millennium faced multiple challenges that culminated in Millennium defaulting on its term loan and filing for bankruptcy.
In 2017, Marc S. Kirschner, as trustee for the investors in the Millennium debt obligations, sued the banks, claiming that they violated securities laws by misrepresenting or omitting material facts in their offering materials. In May 2020, the U.S. District Court of the Southern District of New York held that the underlying syndicated term loan was not a security, and therefore not subject to federal and state securities laws, and granted the banks’ motion to dismiss. Kirschner filed an appeal in October 2021, and the Second Circuit heard oral arguments on March 9, 2023. The parties argued whether broadly syndicated term loans should be considered securities under Reves v. Ernst & Young, a 1990 U.S. Supreme Court case that created the “family-resemblance test” for determining whether notes are securities. Under the test, an instrument is presumed to be a security unless it bears a strong resemblance to one of a judicially crafted list of categories of instruments determined not to be securities. If the instrument does not bear a strong resemblance to a listed security, a court must determine whether another category should be added by reviewing the same factors. The Second Circuit requested the amicus brief from the SEC given the policy implications of the Court’s conclusion as to whether syndicated term loans are securities.
Those that oppose classifying syndicated loans as securities generally argue that such classification would result in increased costs and reduced access to capital. Additionally, the CLO market could be impacted because CLOs have a limit on how many securities they may hold in their portfolios. Those in favor of classifying syndicated loans as securities argue that the Reyes family resemblance test is outdated and the $1.4 trillion syndicated loan market should be subject to the stronger protections afforded by the federal securities laws.
Kirschner v. JP Morgan Chase Bank, Docket No. 21-2726 (2d Cir. 2023).